Sometimes known as a scheme of reconstruction, a scheme of arrangement is a plan of action that allows a company to make arrangements for retiring debt, organizing a takeover, or other financial issues that involve the need for cooperation between the company and its creditors and investors. In most cases, a scheme of arrangement must be reviewed and approved by a court before it is considered binding to all parties concerned.
The range of situations in which a scheme of arrangement may be used will vary, based on governmental regulations regarding business operations and financial lending that apply in the jurisdiction where the company is located. Typically, this particular approach is used when other methods are either not available or are not feasible in light of the company’s current situation. At that point, preparing a scheme of arrangement that can be presented to a court, reviewed, and hopefully approved is often the most prudent move for everyone concerned.
One common example of the use of a scheme of arrangement is to organize debt owed to creditors so that it can be retired in a manner that allows the business to continue operating. In this scenario, debt is rescheduled so that each creditor is eventually paid in full, with the court overseeing that distribution and protecting both the creditors and the company in the process. Here, the idea is to prevent the company from having to liquidate or go into some sort of bankruptcy situation that could lead to creditors receiving reduced amounts.
Another application of a scheme of arrangement has to do with the cancellation of certain long-term debts. This sort of event could occur with a life insurance provider who wishes to settle with selected clients by paying them a lump sum to effectively buy out their current life insurance policies. Doing so helps to eliminate future obligations, possibly opening the door for the insurance provider to restructure the business so that the model is more sustainable in years to come.
A scheme of arrangement can also be used in a company liquidation. Here, the idea is to structure the disbursement of payments to creditors and investors so they coincide with the sale of company assets. As the assets are sold, a select group of creditors receive payments to settle the balances of accounts previously issued to the company. The creditors are prioritized as part of the scheme, allowing each one to have some idea of when to expect payment on the open accounts.